Government finances have been stretched to the limit. A new recession in Europe could lead to downgrades for Italy, Ireland, Spain, Portugal—and France, which would lose its triple-A rating, Standard & Poor's warns.

Yet the currency bloc isn't alone. The US has been downgraded, the UK's rating has been questioned and Japan was cut from triple-A over a decade ago. If the crisis deepens, investors might just have to get used to more double-A sovereigns.

The problem faced is that the gap between triple-A and double-A is at the same time both tiny and enormous. For sovereigns, the gap is zero in terms of recent historical default rates. But a downgrade can still have an effect. It implies a shift from risk-free to measurable, albeit small risk. Some investors will only buy triple-A paper. And it can have knock-on effects on other borrowers, raising financing costs across an economy.

For some governments, a downgrade to double-A may represent more of a blow to prestige than a serious threat. Buyers of their government bonds may find it hard to find substitute investments that match their requirements. This is already clear in the US and Japan, where yields remain low; it could also be true for the UK, although sterling's lesser stature as a reserve currency may be a weakness. Indeed, lower ratings might even encourage better capital allocation if investors realize there is no true risk-free asset.

The eurozone faces a bigger challenge. Investors in French bonds have a readily available alternative in the same currency: German bonds. In the end, European markets might only balance if a double-A France were matched with a double-A Germany. In addition, France's rating is a crucial support to the triple-A bailout facility that the euro zone has constructed. But it is also a problem. One of the hurdles to increasing the size of the facility is the desire to protect France's—and the bailout facility's—triple-A ratings. Ironically, if it were a bailout fund backed by double-A sovereigns, it could actually be larger.

This only goes to highlight the absurdity of the European Commission's threat to ban sovereign ratings it thinks are inappropriate. Europe's biggest problems lie in its inadequate institutions, not in the mirror that ratings—at whatever level—hold up to them.